SEC approves CEO pay ratio rule

By Jeff Drew

The SEC on Wednesday approved a new rule requiring U.S. public companies to disclose the ratio between their CEO’s compensation and that of their median employee.

The rule, passed in a 3–2 vote, implements Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203, some five years after the law was passed. Companies will now be required to reveal the following:

  • The median of the total annual compensation of all their employees except the CEO.
  • The annual total compensation of the CEO.
  • The ratio of the two amounts.

The pay-ratio proposal has generated what SEC Chair Mary Jo White called “a contentious and, at times, heated dialogue.” The commission has received more than 287,400 comment letters on the proposal. That total includes more than 1,500 unique letters, with the rest being form letters.

Debate over the pay-ratio requirement intensified after the SEC proposed the new rule in 2013. Proponents of the changes argued that knowledge of the CEO-employee pay ratio would provide investors with information helpful in making investment decisions and exercising their shareholder rights, especially in cases where they have a say on executive pay. Opponents of the measure countered that the disclosures would add no information of value and that they would be expensive to implement.

“While there is no doubt that this information comes with a cost, the final rule recommended by the staff provides companies with substantial flexibility in determining the pay ratio, while remaining true to the statutory requirements,” White said in a published statement. “The final rule provides companies with substantial discretion to use estimates and sampling as a means to determine the median employee and the employee’s compensation.”

SEC commissioners Luis A. Aguilar and Kara M. Stein joined White in voting to approve the pay-ratio requirement, while commissioners Michael S. Piwowar and Daniel M. Gallagher voted against the plan. In published dissenting opinions, Piwowar and Gallagher called the pay-ratio rule a political ploy included in the Dodd-Frank act to shame companies into lowering CEO pay.

“Today’s rulemaking implements a provision of the highly partisan Dodd-Frank Act that pandered to politically-connected special interest groups and, independent of the Act, could not stand on its own merits,” Piwowar said in his statement. “I am incredibly disappointed the Commission is stepping into that fray.”

Said Gallagher: “To steal a line from Justice [Antonin] Scalia, this is pure applesauce.” (See full statement).

Also see the full statements of Aguilar and Stein.                  

Median calculations

The new rule establishes guidelines for companies to determine a “median” employee to compare with the CEO. Companies are granted considerable flexibility in choosing a methodology to identify a median employee. Companies can use their total employee population or a statistical sampling of that population, following guidelines set out in the rule. In addition, companies can keep the same median employee for up to three years unless there are major changes to their employee population or the median employee’s compensation.

The new guidelines require companies to calculate the median employee’s annual total compensation using the same rules used to calculate the CEO’s compensation. The rule allows companies to apply a cost-of-living adjustment in calculating the median employee’s total annual compensation and CEO pay ratio, although companies must also disclose compensation and pay ratio figures without the cost-of-living adjustment.

The disclosure requirement applies to all companies required to provide executive compensation disclosure under Item 402(c)(2)(x) of Regulation S-K. Smaller reporting companies, foreign private issuers, MJDS filers, emerging growth companies, and registered investment companies are exempt from the requirement.

The rule requires companies to report the pay ratios starting with their first fiscal year beginning on or after Jan. 1, 2017.

Jeff Drew ( is a JofA senior editor.

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